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MetLife Vends $1B Notes

Yesterday, MetLife Inc. (MET) sold callable notes worth approximately $1.0 billion in a two-part offering that were scheduled for remarketing and settlement in 2012, according to Reuters.

Previously, the notes were issued as senior debentures worth $1.0 billion, which were due to mature in 2023. The senior debentures then comprised of 40 million common equity shares of the company issued to AM Holdings LLC – a subsidiary of American International Group Inc. (AIG) – in connection with the acquisition of American Life Insurance Co. (:ALICO) from the latter.

Presently, the first set of $500 million 5-year notes is issued at $100.5119, while it bears a coupon rate of 1.756% and yield of 1.67%. The notes are callable 50 basis points (bps) and carry a spread of 105 bps over the Treasuries. The remarketed notes are dated to mature on December 15, 2017.

Meanwhile, the remaining $500 million 10-year notes are issued at $100.6334 and are slated to mature on December 15, 2022. The notes bear a coupon rate of 3.048% and yield of 2.985%. The notes are callable 50 basis points (bps) and carry a spread of 135 bps over the Treasuries. Interests on both the set of notes will be paid semi-annually, with the first pay scheduled on June 15, 2013.

MetLife appointed Morgan Stanley (MS), JP Morgan Chase & Co. (JPM), Credit Suisse AG (CS) and Deutsche Bank AG (DB) as the joint book-running managers for the sale. Both the set of the above-mentioned notes are rated “A3” and “A-” from Moody’s Investor Service of Moody’s Corp. (MCO) and Standards & Poor’s (S&P), respectively.

Additionally, the net proceeds from the remarketing of the notes will be paid to the common shareholders. Of this, $1.0 billion will be used by these shareholders to purchase newly-issued shares from MetLife under stock purchase contracts that consists part of the common equity share units.

Last month, MetLife also raised $750 million from the sale of senior unsecured notes that are scheduled to mature in February 15, 2042. The company expects to utilize the funds raised from the issuance of these notes for business operations and to retire senior notes worth $750 million that are due to mature in August and November of 2013.

Further, the ratings from all the agencies validate MetLife’s solid earnings growth and escalated its operational scale on the heels of exceptional operating performance from its diversified business basket and brand appreciation. Moreover, efficient management of the company’s investment portfolio and enterprise risk has helped it secure competitive advantage in the market.

Despite the lingering concerns regarding the low interest rate and economic volatility, MetLife has been successfully maintaining acceptable risk-based adjusted capital (RBC) ratios. Further, the latest notes sale is not expected to hamper the financial leverage that stood at 36% at the end of June 2012, which is still higher given the lower capital in 2012 compared with 2011, primarily led by alterations in DAC accounting standards this year.

Conversely, the debt leverage is expected to improve to about 24% by the end of 2013, when MetLife will have paid off the debts that are scheduled to mature next year.

Additionally, S&P anticipates MetLife to produce net retained earnings of about $3.9 billion and $4.2 billion in 2012 and 2013, respectively. This estimate includes the remarketing and settlement of equity units worth $1 billion, in both 2012 and 2013. The rating agency estimates EBITDA in the band of $9–10 billion with EBITDA fixed-charge coverage of 6.5x to 7x, which was 7.2x at the end of June 2012.

We retain our long-term Neutral recommendation on MetLife. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates slight upward pressure on the stock over the near term.